Forms of Business Ownership

1. CHAPTER 5 Forms of Business Ownership

2. Choosing a Form of Ownership • There is no one “best” form of ownership. • The best form of ownership depends on an entrepreneur’s particular situation. • Key: Understanding the characteristics of each form of ownership and how well they match an entrepreneur’s business and personal circumstances. Ch, 5: Forms of Business Ownership

3. Factors Affecting the Choice • Tax considerations • Liability exposure • Start-up and future capital requirements • Control • Managerial ability • Business goals • Management succession plans • Cost of formation Ch, 5: Forms of Business Ownership

4. Major Forms of Ownership • Sole Proprietorship • Partnership • Corporation • S Corporation • Limited Liability Company • Joint Venture Ch, 5: Forms of Business Ownership

5. FIGURE 5.1 (A) Forms of Business Ownership – Percentage of Business USA Ch, 5: Forms of Business Ownership

6. Advantages of the Sole Proprietorship • Simple to create • Least costly form to begin • Profit incentive • Total decision making authority • No special legal restrictions • Easy to discontinue Ch, 5: Forms of Business Ownership

7. Disadvantages of the Sole Proprietorship Unlimited personal liability Limited skills and capabilities Feelings of isolation Limited access to capital Lack of continuity of the business 5 - 7 Ch, 5: Forms of Business Ownership

8. Partnership • An association of two or more people who co-own a business for the purpose of making a profit. • Always wise to create a partnership agreement. • The best partnerships are built on trust and respect. Ch, 5: Forms of Business Ownership

9. Advantages of the Partnership • Easy to establish • Complementary skills of partners • Division of profits • Larger pool of capital • Ability to attract limited partners Ch, 5: Forms of Business Ownership

10. Types of Partners • General partners • Take an active role in managing a business. • Have unlimited liability for the partnership’s debts. • Every partnership must have at least one general partner. • Limited partners • Cannot participate in the day-to-day management of a company. • Have limited liability for the partnership’s debts. Ch, 5: Forms of Business Ownership

11. Advantages of the Partnership • Easy to establish • Complementary skills of partners • Division of profits • Larger pool of capital • Ability to attract limited partners • Minimal government regulation • Flexibility • Taxation Ch, 5: Forms of Business Ownership

12. Disadvantages of the Partnership Unlimited liability of at least one partner Capital accumulation Difficulty in disposing of partnership interest without dissolving the partnership Lack of continuity Potential for personality and authority conflicts Partners bound by law of agency 5 - 12 Ch, 5: Forms of Business Ownership

13. Limited Partnership • A partnership composed of at least one general partner and one or more limited partners. • A general partner in this partnership is treated exactly as in a general partnership. • A limited partner has limited liability and is treated as an investor in the business. Ch, 5: Forms of Business Ownership

14. Corporation • A separate legal entity from its owners. • Types of corporations: • Domestic – a corporation doing business in the state in which it is incorporated. • Foreign – a corporation doing business in a state other than the state in which it is incorporated. • Alien – a corporation formed in another country but doing business in the United States. Ch, 5: Forms of Business Ownership

15. Corporation Types of corporations: • Publicly held – a corporation that has a large number of shareholders and whose stock usually is traded on one of the large stock exchanges. • Closely held – a corporation in which shares are controlled by a relatively small number of people, often family members, relatives, or friends. Ch, 5: Forms of Business Ownership

16. Advantages of the Corporation Limited liability of stockholders Ability to attract capital Ability to continue indefinitely Transferable ownership 5 - 16 Ch, 5: Forms of Business Ownership

17. Disadvantages of the Corporation • Cost and time of incorporation process • Double taxation • Potential for diminished managerial incentives • Legal requirements and regulatory “red tape” • Potential loss of control by founder(s) Ch, 5: Forms of Business Ownership

18. S Corporation • No different from any other corporation from a legal perspective. • An S corporation is taxed like a partnership, passing all of its profits (or losses) through to individual shareholders. • To elect “S” status, all shareholders must consent, and the corporation must file with the IRS within the first 75 days of its tax year. Ch, 5: Forms of Business Ownership

19. Limited Liability Company (LLC) • Resembles an S Corporation but is not subject to the same restrictions. • Two documents required: • Articles of organization • Operating agreement Ch, 5: Forms of Business Ownership

20. Limited Liability Company (LLC) • An LLC cannot have more than two of these four corporate characteristics: • Limited liability • Continuity of life • Free transferability of interest • Centralized management Ch, 5: Forms of Business Ownership

21. The Professional Corporation • Designed for professions – lawyers, doctors, dentists, accountants and other professionals • Created in the same manner as a corporation • Identified by the abbreviations: • P.C. – Professional Corporation • P.A. – Professional Association • S.C. – Service Corporation 5 - 21 Ch, 5: Forms of Business Ownership

22. The Joint Venture Much like a partnership, but it: Is formed for a specific purpose Has a beginning and an end 5 - 22 Ch, 5: Forms of Business Ownership

23. Conclusion The “right” choice of the form of ownership is unique to every entrepreneur and their business. Each form has advantages and disadvantages. The entrepreneur must be thoughtful and strategic about this important decision. 5 - 23 Ch, 5: Forms of Business Ownership